Friday, November 28, 2014

Trading Up from Poverty

WASHINGTON, DC – A long-held tenet of international-trade theory is that, in the long run, increased trade correlates with faster GDP growth. But the challenge – which my institution, the World Bank, is working to overcome – is to ensure that trade-driven growth benefits the poor. That is why the heads of seven multilateral institutions, including the World Bank, strongly supported the push for the trade-facilitation agreement that was reached earlier this month at the World Trade Organization’s ministerial conference in Bali.

To be sure, the incidence of poverty worldwide has reached an historic low, with the extreme-poverty rate (the share of the population living on less than $1.25 a day, in purchasing-power-parity terms) falling in 2010 by more than half since 1990. But that still leaves more than one billion people worldwide living in extreme poverty. Moreover, progress has been uneven, with poverty rates having declined far more in East Asia and Latin America than in Sub-Saharan Africa.

In order to cope with this changing global context, the World Bank has introduced a new objective to guide its poverty-reduction efforts: promoting sustainable, shared prosperity by monitoring the income growth of the poorest 40% of every country’s population. Indeed, we are rethinking how we define success in development and how we provide trade-related support to developing countries.

Trade’s relationship with poverty is variable and complex. Increased trade benefits consumers by reducing the prices of goods and services. It gives the poor access to a wider variety of commodities, while providing firms with a more diverse selection of inputs.

But increased trade can also eliminate low-skill factory jobs and reduce agricultural prices – outcomes that disproportionately hurt the poor. In India, for example, poverty has declined more slowly in areas where farmers face increased foreign competition. Given constraints on inter-sectoral labor mobility, stemming from barriers to skills acquisition and rigid labor-market regulations, the poorest workers have few options when such changes occur.

As a result, increased trade may demand difficult adjustments in the short term. Individuals may need to change their consumption habits; labor may have to be reallocated across sectors; and some workers may have to adjust to lower wages, at least temporarily. Some firms will grow, while others will contract.

Experience has demonstrated that, with forward-looking policies, governments can enhance trade’s benefits and mitigate its negative impact on the poor. Policymakers can promote retraining programs for displaced workers and remove regulatory obstacles that impede their flow into thriving, export-oriented sectors. And, in order to protect farmers, they can eliminate export restrictions and ensure that timely, accurate market information is accessible.

With such policies in place, the World Bank’s efforts to bolster developing countries’ trade linkages could facilitate substantial poverty reduction. For example, we help developing-country governments connect firms, farmers, and households to markets and supply chains, thereby fostering increased investment and boosting economic activity.

Furthermore, we support infrastructure-development projects, enabling countries to build the roads, bridges, and ports that link traders to markets. For example, a $1.8 billion highway project in Kazakhstan is facilitating trade-related transport across the country, stimulating the economies of the country’s poorest provinces, and creating more than 30,000 jobs. In Nepal, the Bank is financing reconstruction of the steep, dangerous, and busy road that carries most of the country’s exports to India, and it is supporting the government’s efforts to connect some of the country’s remotest districts to the main road network.

The World Bank also helps countries to establish clear customs rules that more effectively protect traders from inconsistent treatment or solicitations for bribes. And we are working to address costly border inefficiencies. For example, we are helping to simplify and modernize trade procedures through Cameroon’s Douala port, and we have helped the government of Laos to establish an online portal that provides traders with access to all relevant laws, procedures, schedules, and forms from border-management agencies.

Moreover, since 2010, the International Finance Corporation, the Bank’s private-sector lending arm, has been promoting the integration of small and medium-size enterprises into global supply chains by increasing their access to capital. The $500 million Global Trade Supplier Finance program, a joint investment and advisory initiative, is currently providing short-term finance to thousands of emerging-market SMEs.

In order to maximize the impact of such initiatives, world leaders should cooperate to build and maintain an open trading system. The WTO’s Bali conference provided an important opportunity to develop a new trade-facilitation agreement that expedites the movement, release, and clearance of goods at border stations; clarifies and improves trade-related rules; enhances technical assistance; and encourages cooperation among border-control agencies.

But the agreement that was reached in Bali cannot succeed unless wealthy countries and donors agree to support developing countries’ efforts to enact related policies and reforms. Given this, it is crucial that developed-country policymakers recognize that a more efficient, better integrated, and more inclusive global trade regime will benefit all countries.

With genuine commitment from the international community and the appropriate domestic policies in place, trade can be a powerful force for poverty reduction.

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    1. CommentedMr Econotarian

      If the WB is so concerned about "rigid labor-market regulations", why has its Doing Business Index watered down its reporting of these regulations?

      Every time the WB funds activity of a government too corrupt or untrustworthy enough to raise money for a project from the global financial market, it is only rewarding a tyrant. The WB would reduce poverty faster by concetrating on teaching the world about economic liberalization. China did not need the WB to grow at 10% per year, it needed Mao to die so that more reasonable leaders could take the helm.

        CommentedJ Edward

        Economic liberalization is all well and good, but we must not forget the East Asian crisis as an example of the "one size fits all" prescription of liberalization that caused more harm than good. Breakneck liberalization puts people out of work and causes social unrest, rendering emerging market economies unattractive for foreign investors. Hence its important to liberalize slowly, maintaining high levels of employment (like China did).

    2. CommentedZsolt Hermann

      We can look at trade as the blood circulation system of the "body" of the global human society.
      As in the body, the body, including all the organs, cells are healthy when this circulation reaches all the parts of the body in an equal manner, which is a relative equality, there are cells and organs needing more of the blood supply while others need less or almost nothing depending on their function, or state, whether they are active or inactive.
      But in a healthy body all function, necessity, contribution and necessary nutrition is decided, based on the global function of the whole body.
      The primary calculation is always global, integral, what is it that the whole body needs at any given moment, and only when this calculation is done are separate calculations made for each cell and organ.
      In truth in the body this all happens simultaneously, as the governance is systemic, considering all the data from all parts of the body every moment.
      Today global human society is exactly like a common, united body with unbreakable interconnections and interdependency, but we, each cell and organ still behave as if we were separate, isolated, completely individualistic, directing the blood flow, trade only towards ourselves, ignoring other parts of the common body.
      If we want to solve hunger, poverty, or in fact any other part of the global crisis we have to start thinking, planning and acting exactly how a single, healthy body, organism does.
      This is not even our choice, our new, global, integral evolutionary conditions dictate it and our choice is whether we adapt consciously, willingly or by blows and suffering.

        CommentedEdward Ponderer

        Trade is the example of negotiation par excellence. Negotiation is, to define, the use of time, knowledge, and perceived (or used--i.e., war) power in a web of tension to achieve what you want to the extent possible. The bilateral negotiation of the flat world of times past was in a clear imbalance between parties, winner take all--literally, else in a near balance, a win-win would be negotiated by both parties. But even in the imbalance, times changed as people's services became more useful with technological development. FIrst as slaves to a master, so the loser got--at least--life and sustenance. Then as serfs to a nobleman, where they even had a little property. Then as paid workers to wealthy land owners and industrialists.

        Then the world became round, service products, and skills were complex and obtained in equally complex manner with the growth of the information age. And here something new happened. Economic and military influence flowed out from the superpower monopolar and dipolar, to the multipolar. Particularly, one you get three or more, a weak one can influence by playing another off a third in regions of balanced tensions between these, and draw further negotiating power to itself. The result is feed-forward into a "fractal basin," and deterministic chaos. The next stage--if we are to mimic the evolutionary successes of the natural world, is to work a decentralized power in round table formation--turning chaos into cross-communication/sense, and system control--bringing matters to homeostasis. If not, then this system remains chaotic in its general sense, and as far as we are concerned, the dominant principle is Murphy's law.

        As such, we come to the ultimate evolution of negotiation--the balance of the needs of all parties in a win-win-win-... -- which translates into a WIN for the System Humanity. Then we will have really traded up from poverty--and it will be permanent because it will be self-regulating and not at the mercy of the foibles of petty, greedy old-school international ideological politics or the individual ego of a clever ruling class under any system capitalistic, socialistic, aristocratic, or theocratic.

        What failures we are now seeing are in the oscillations, and successes we are seeing in the envelope, of the global function of approach to this final self-regulating state. This, assuming--let us hope--that the oscillation will eventually decay the envelope into a smooth curve, rather that the envelope exploding into chaos.